Cash out refinance in Canada: All you need to know
What is a cash out refinance?
When refinancing your mortgage, you can choose to increase the size of the mortgage loan that you’ve taken out with your lender. Doing so increases the amount of money you owe the lender, but the difference in amount between your previous mortgage amount and the new one can be withdrawn as cash.
This is known as a cash out refinance in Canada, and it’s a great way to use your home equity to borrow money in a pinch. When used properly, they can help you get the funds you need to make a financial investment that pays out more than what you put in. However, cash out refinances in Canada should only be used once you’ve understood what they entail.
Let’s break them down in detail to get a proper idea of their ins and outs.
How does refinancing work in Canada?
A standard mortgage refinance involves renegotiating the terms of your mortgage with your lender. It can be done either at the end of your mortgage term or any time in between, and you can make changes to various features like the interest rate and mortgage term.
A cash out refinance works the same way, except the focus is on adjusting the mortgage amount itself. This makes them a little special, and not all lenders might be willing to offer a cash out refinance in Canada.
Relation between home equity and value in a cash out refinance
A cash out refinance is also dependent on how much home equity you have built up against your mortgage. When you opt for a cash out refinance in Canada, you’re essentially trading your old mortgage amount for a new mortgage with a larger total amount.
That being said, lenders won’t just give you a bigger loan without any conditions. Getting a cash out in Canada will first involve lenders comparing the appraised value of your home against your home equity. Based on this, they can provide you with the estimated amount they can offer. This means that you will need to get a home appraisal before you can get a cash advance in Canada.
What are the benefits of a cash out refinance in Canada?
There are several benefits to getting a cash out refinance, but the biggest is that you can tap into your home equity without having to sell your home. Usually, you can only access accumulated value in home equity through appreciation if you make a sale and get those funds in hand. But selling is not always the best option unless you have another property to move into.
If you’re looking to get a loan that doesn’t carry a huge interest rate, cash out refinances can be one of the better options available. Since it’s tied to your mortgage, a cash out refinance comes with lower interest rates on average, which can save you money in the long run.
Since a cash out refinance is essentially a loan with a mortgage repayment structure, you’re getting all the benefits of mortgage plans, such as the smaller payments and larger loan amount compared to other loan types.
Keeping in mind the drawbacks of a cash out refinance in Canada
Cash out refinances in Canada aren’t without their own drawbacks. At the end of the day, a cash out refinance is adding to the total debt you owe your lender. This means that you need to be very confident in your ability to repay the extra amount you’re getting in hand.
When you get a cash out refinance in Canada, you’re staking a portion of your home equity as collateral. If you fail to make proper repayments on time, your lender has the right to repossess your home and sell it to recover their investment. This means that your home ownership itself is at risk if you’re not financially prepared to deal with monthly payment values.
Keep in mind that while a cash out refinance does offer lower interest rates compared to other unsecured loan options, it is still usually higher than a standard mortgage, since the lender is adding risk by giving you even more money as a loan on top of your existing mortgage.
What’s the best way to use a cash out refinance?
A cash out refinance has its pros and cons, but how you use the money you get from it is important. Of course, taking out a loan for emergencies is understandable, but outside of these situations, it’s important that you use the money you get wisely.
One of the best uses for a cash out refinance is to fund home renovations. If the renovations you’re making add more features, functionality, or space to your home, it is likely that your home’s appraised value will go up. This is a great way to reinvest your equity value into your home to make more money in the long run.
Cash out refinances are also a good way to consolidate your debts. Since you can have many different types of loans with different interest amounts, using the money from a cash out refinance to pay off higher interest loans entirely means you can put your debt in one place. At the relatively low interest rates you’ll get, you might be able to save thousands of dollars on interest over your repayment period.
We don’t recommend using a cash out refinance to fund your next vacation or to buy non-essential luxuries. These costs will only add to your owed amounts and put you in a worse position down the line, especially if you’re struggling to manage your existing debt.